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Nvidia's Colossal Growth Continues to Slow Down

Nvidia, the world's largest supplier of discrete graphics chips, has been struggling to pare down its inventory. The company closed out the fourth quarter of the 2019 fiscal year with $1.57 billion of unsold inventory, up from $1.42 billion in the previous quarter and up from $796 million in last year's fourth quarter. That statistic is a symptom of a larger series of setbacks for the Santa Clara, California-based company.

The Silicon Valley company’s colossal growth over the last three years is slowing down. Last month, Nvidia slashed $500 million from its fourth quarter sales forecast to reflect reduced demand for graphics processing units (GPUs) used in gaming, its largest business, and data centers, its fastest-growing business. In November, Nvidia projected $2.7 billion of revenue in the fourth quarter of 2019. In January, the company knocked that down to $2.2 billion.

Those calculations were spot on. On Thursday, the company reported fourth quarter sales totaling $2.21 billion, down 24 percent over the last year and down 31 percent since the third quarter of 2019. The downturn was driven by sluggish sales in the gaming segment, according to chief financial officer Colette Kress. Gaming accounted for $954 million of revenue last quarter, down 45 percent year-over-year and 46 percent quarter-over-quarter, she said.

The company’s growth started clogging up in the third quarter last year, according to Kress. Demand for graphics cards based on Nvidia's Pascal architecture plunged following the cryptocurrency crash. That saddled the company with a glut of unsold inventory. In November, Nvidia said that it had stopped ordering those chips from its main contract manufacturer, Taiwan Semiconductor Manufacturing Corporation, to prevent itself from flooding the market.

Other problems pummeled the company's fourth quarter results. The global economy has started to deteriorate, tamping down demand for graphics chips used in gaming, particularly in China. Sales of graphics cards based on Nvidia's new Turing architecture were also worse than anticipated. Potential customers may be holding out for prices to fall. The company's 2019 gaming revenue grew 13 percent to $6.25 billion, 23 percent slower than the previous year.

Even the company's data center segment has started to slow down. Customers are delaying orders due to economic uncertainty, according to Nvidia. Google, Microsoft, Amazon and other cloud computing vendors are among its largest customers. They employ graphics processors from Nvidia to train artificial intelligence algorithms on all the data drifting through their data centers. These chips are the current gold standard for training these sorts of applications.

Nvidia is also building chips capable of inferencing: using artificial intelligence algorithms to solve the sorts of problems they were trained to solve. These jobs are usually handled in data centers by Intel CPUs. Graphics processors used for inferencing account for one-tenth of Nvidia's data center revenue, according to Kress. Xilinx has also designed field-programmable gate arrays (FPGAs) that can be dropped in data centers to act as accelerators.

The slowdown has left the company's shareholders shaken. Nvidia suffered a significant blow last month when Softbank, one of its largest shareholders, sold every last shred of its investment, which totaled $3.63 billion. On Monday, the $96-billion company was worth slightly more than $157 per share, down from around $259 at the end of the second quarter in August. The company's shares are still around 50 percent more valuable than they were this time in 2017.

“This was a turbulent close to what had been a great year,” Jensen Huang, Nvidia's chief executive, said in a statement. Sales totaled $11.72 billion in the 2019 fiscal year, an increase of 21 percent from $9.71 billion in 2018. Profits rose from $3.05 billion to $4.14 billion over the last year. Earnings of $6.63 per share jumped 38 percent from $4.82 per share in 2018. “Despite this setback, Nvidia’s fundamental position and the markets we serve are strong," he stated.

The company's server sales were $679 million in the fourth quarter, growing 12 percent from the same period last year but falling 14 percent compared to the third quarter. For the full year, the data center unit surged 52 percent to $2.93 billion. "The accelerated computing platform we pioneered is central to some of world’s most important and fastest growing industries—from artificial intelligence to autonomous vehicles to robotics," Huang said in a statement.

The company said it would report $2.15 billion to $2.25 billion in revenue in the first quarter, a decline of around 27.5 percent from the same quarter a year ago. The company's inventory should start returning to normal in the current quarter, Kress said on an analyst conference call Thursday. She also said that 2020 revenues would be the same or slightly lower than 2019. But Huang added in a statement: "We fully expect to return to sustained growth."